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Mostly I found that the worth is about 12 months income for content revenue sites and 6 months for e-shops
What's the latest on this?
Anyone any ideas?
Surely you have turnover of the business, the revenue it generates.
Then you have gross profit which is turnover minus costs (including wages, rent, web master's time (is that not just wages).
Then you have net profit which is gross profit minus corporation tax and any other tax liable on company profit in your region.
At least that seems to be what our accounts look like.?
Regards value it comes down to individual sites and buyers. For instance we once sold a site to one of its main advertising brokers. It was worth far more to them since they can then place their higher cpm campaigns on a site they own. Push lower campaigns to sites they broker for.
Most of the very large buys recently seem to have had nothing to do with previous revenue, sometimes the sites have been losing money.
So I don't think there is a one size fits all. People can be after more than just money from a specific site...sometimes influence over a readership or just monopolizing an area.
[edited by: FattyB at 6:11 pm (utc) on Aug. 29, 2007]
Surely you have turnover of the business, the revenue it generates.
I am a little confused here what you mean. My definition for "turnover" is in personnel, but you seem to be using it in another context, what exactly do you mean?
Most of the very large buys recently seem to have had nothing to do with previous revenue, sometimes the sites have been losing money.
This is why we had a dot com meltdown a few years back that caused lots of people to lose tons of money. Revenue does count and so does profitability. I would never ever pay big cash for a site based on the "potential" unless I was buying it with very clear ideas of how I could turn the site around and make it profitable. However if I were doing that I would be buying at a VERY steep discount as I would with any asset that was under performing and the risk of a turn around was less than certain.
FH
FattyB, very crudely, gross profit is turnover less cost of sales (your purchase cost of all goods sold). Then you deduct salaries, expenses etc to arrive at net profit. That's profit before tax. I'm sure there's a lot on the subject at places like Wikipedia.
Revenue does count and so does profitability.
Like anything else, a website is worth what someone is willing to pay for it.
While what you say does have some truth to it and anyone that was in game during the dot com era can tell you first hand it happened all the time, I would not say this is a strategy to depend on.
Knowing what it is worth will give you an edge in negotiations and will most certainly help you sell it faster when you have decided to stop waiting for that super rich and stupid person that will pay waaaayyyy more than the site is actually worth ;)
site cost/revenues
site cost /earnings.
For many traditional small businesses you'll see valuations of 5-6x EBITA is a common valuation metric. This is basically about 5 times the *annual earnings* of the business.
Internet gets weirder because in my experience the 5x EBITA metric is often considered to give "way too high" a valuation for small sites and "way too low" a valuation for big sites. Google, for example, is valued at some 50x it's current earnings and sites like YouTube were valued at "infinity" x their EBITA of $0.
As somebody who does buy sites I'm *very generally* going to be happy to pay 1x annual earnings, will carefully review an offer at 2x, and would likely not bother reviewing a site where they wanted more than 3x annual earnings unless it was very clear the site was very poorly monetized. I'm going to downgrade/avoid sites based on PPC arbitrage schemes and upgrade for strong organic listings and excellent content.
The reason I would not tend to pay more than 3x earnings for most websites relates to the risk they'll crash in rankings, combined with the ease of creating a new niche website myself at minimal cost.
The market for sites is not mature or regulated so use caution and be very skeptical of revenue claims or even the implications of *real* revenue numbers. For example a site might play up a "real" $10,000 per month in revenue but fail to properly disclose that they spent $12,000 in PPC to get that 10k.
For example a site might play up a "real" $10,000 per month in revenue but fail to properly disclose that they spent $12,000 in PPC to get that 10k.
You raise an interesting question. In the now famous book Security Analysis by Benjamin Graham, who was Warren Buffet's mentor, he gave all kinds of tricks to detect abnormalities in the accounting records for businesses because at the time he wrote the book the SEC didn't exist and accounting standards and financial reporting were anything but standard or regulated.
So having said that how do you verify the records of a business like this where the regulations aren't there? JoeDuck's example above is a perfect example of a land mine that you might not discover until after you have bought the site.
But there's another reason: Past profits aren't as good an indicator to future profits online as they are for offline businesses. Too many things change too frequently online. And, as I've pointed out before, the only use for past profit is as a guide to future profit. The less secure the regular profit the less the multiple you'll get for your business. The more the expectation the buyer has for future profit the higher the multiple you can expect. Which explains youtube.
That sounds like an interesting book, I will check it out.
There is no long term in a business area that's only been established for 15 years. How to value a site then? First, establish some sort of trust in the seller's figure. Next, there is no guaranteed next, each site is so different. It has to all come down to personal judgement, capabilities and aspirations.
Where are the markets (aside from sitepoint) that offer sites for sale?
There are a lot of markets for sites/web businesses. I can't link you to a site but a Google search [google.com] is as good a place to start as any.
Say a site is priced at 250K. What would you look for in the following stats to justify that price:
1. Domain/site age
2. Net earnings/year
3. Visitors/month
4. Hours spent/week maintaining
5. Newsletter subscriptions?
My evaluation might be:
1. Old - at least 5-6 years. Preferably 7-9 years old.
2. 70-80k net/year
3. 500,000
4. Minimal - say 2-3 hours a day.
5. 10,000+
1) Strategic fit and ease of monetization - if a website can be better monetized by a buyer, or can be used to drive traffic to a well-monetized site, current revenue and profit are largely meaningless. It's all about how well the buyer can monetize the site.
2) Expense changes post-acquisition - this gets back to the value of the owner's time and knowledge. Say I have a site that I spend an hour a day on, mostly in spare moments. That may translate into little or no cost for me. One buyer might have to hire both tech expertise (for site maintenance, design work, server issues, etc.) and topical expertise (for writing new content, managing user content, etc.). By the time the buyer lines up the necessary staff or contractors, the P&L (and valuation) may look entirely different. Conversely, I might be paying a Linux admin because I don't do that or I don't have time; a buyer with the expertise himself or on staff might be able to take the site over and eliminate that expense, improving the profit.
3) Competitive dynamics - if a competitor buys your site, will he change from one of many to a dominant player? Or will he eliminate an annooying competitor (you)? Either could add to the acquisition value of the business for that buyer.
4) Your position and industry - if you have a dominant or very strong position in an area that others would like to be in, your business is probably worth more than the numbers suggest. This is part of why sites like YouTube have high valuations that bear little resemblance to actual profits. They offer a dominant position in an area that's high volume and growing - achieving that kind of market share from scratch would be next to impossible even with vast sums to spend.
There are lots more, but the key thing is to try to look at the value of your business from a variety of different perspectives and scenarios. If you find one scenario that seems to make your business worth more than others, then be sure to look for buyers that fit that scenario. Just about any profitable business can find a buyer - the key is to find the buyer that will place the highest premium on the business.
How can you compare, or come up with any formula, when you are comparing apples to oranges?
Back to Watching
WW_Watcher
On a side note, what about sites that are not currently in it for the money. A close friend of mine owns a site that doesn't do a website for profit (it is more about open source) recently was offered over $150k for his site. He has never made a penny from it. If he wanted to make money I am sure he could though. But the formulas that so far have suggested do not take account of many things that matter greatly for some sites.
Ive also seen sites going for as much as 40 times earnings and understand that other have been sold even higher.
A lot depends on the sector the site is in, its position in the market, how valuable it is to the buyer, how much potential it has, what its financials are like, its brand, its traffic, the customer data, the list is endless.
One site is not like another.
As mentioned a small ecommerce site doing little income with low positioning and low brand awarness that can be easily replicated then i wouldnt give you 5 times for it! BUT a site that has everything going for it, thats established has great positioning and great potential could attract a serious premium.
You can not apply a basic metric to all sites because some stand out from the crowd and would not get sold at all unless the offer was serious and 5-7 times is for small change. You wont see a serious well established site with high potential going that cheap thats for sure!
Or something like that. :)
My background: Owner of multiple small businesses, & some experience as a business broker.
Disclaimer = The broker experience was everything not just internet. Internet may be a little unique, but probably not as unique as everyone assumes. A lot of it depends on who your buyer is.
Definitions:
Gross Revenue = All the money you take in
Gross profit = your profit after cost of sales (usually the cost of the product you just sold) also called "above the line profit"
Net Profit(or below the line) = Gross Profit minus all operating costs (the lights, employee wages, copy paper, office space)
Business valuation:
The only businesses that sell for 5X net sell to Google or other megalithic corporations. If you can get the attention of the big guys you may get that and more. But small businesses selling to individuals generally bring 1.5x to 3x the adjusted net income.
Adjusted net income:
This is where you add in a salary to replace the owner, office rent to replace home office, etc to get the actual net income the business would produce for a stockholder (someone not actively involved in the business) Sometimes called EBIDTOC (earnings before interest depreciation taxes and owner compensation)
By the way this is where you also add back in the value of all the personal crap you buy out of your business account.(perks)
Lifestyle Value:
Business from home? on the beach? Add some kicker for the buyers perception that it's an ideal job.
Buyer profile:
Businesses are usually sold to one of three groups of people...Corporate refugees with savings or severance money...Employees of the company being sold...or Foreign Nationals who have diligently saved to live the American Dream. Also sometimes competitors garnering industry marketshare.
Due diligence:
To sell your business you've got to get naked. Due diligence involves all your bank statements, tax returns, etc to verify income.
Getting Paid:
Most small businesses never sell. Because when the owner sees what he's going to get for his baby he says to himself "I could just run it for another couple years and get that...and still have the business"
Health problems, death,or retirement, precede most businesses that actually sell.
Of the ones that do sell, almost all of them involve a note carried back by the seller. The seller usually retains access to the books with a provision that they can protect their interest in the note by taking the management back over if the financials sag below set parameters.
The note protects the buyer, because if you sell him a self-destructing business he will quit paying you.
Business Brokers:
If you're serious about selling, or just want a free idea of what your business is worth in the real world, they're a good idea. (not a sales pitch, I'm out of it, but the phone book is full of them)
It lends third party credibility to your sale. And the average guy can sell his business about as well as the average guy can code HTML, or sell his own house. It's also too personal a sale.
Al good business broker will charge you 10% of the sales price if it sells...nothing if it doesn't. You can talk some of them down to 8% maybe even 6% if your deal is sweet and they're hungry. Some try for a fee up front to cover their advertising. I would say no, but if you pay one be sure to reduce the commission.
For what it's worth :o)
Gross profit is revenue less the cost of sales. If you are selling products, cost of sales is the cost to you of the products themselves.
In a services business (which is what a web business is - you are providing a service), cost of sales is the direct cost of providing the service. For example: web hosting fees, non-capitalizable development costs, non-capitalizable content costs, maintance costs, etc.
Other costs (advertising, coffee for employees, mailing, stationary, etc) are expenses and are deducted from gross margin to determine net profit.
If we had to pay someone to do what we do, then it's pretty much a zero sum game.
I look at what it would cost me to make a site compared to buying a similar existing site. If a site didn't make any profit at all but had several thousand great links, I might buy it in a heart beat for a good price.
And to me, more importantly, how long it would take compared to doing it myself.
Chip-
My websites are worth how ever much somebody is willing to pay.
The internet isn't stable enough to declare it a "stable market" as far as pricing goes. The internet is the fast growing media medium in the world. Taking that into consideration, I don't even feel motivated to sell my sites now.
[edited by: PoohBear88 at 7:08 pm (utc) on Sep. 10, 2007]
but if you don't have a team of developers and the company is "you" ....then.... you have failed.
You don't have to have employees to be considered a "business" entity. There are sole proprietors everywhere. I know plenty of "business owners" with no employees who make hundreds of thousands (or millions) each year, fully licensed where required, recognized by the IRS as a business, the BBB, etc.
To call that entity a "failure" simply because it doesn't have employees or a "team" is just silly. In fact, if you can mimimize your overhead and do the job of a whole "team" yourself, then that is brilliant.
Excellent point Nuevo about the value of links..
Some businesses with $0 net profit are valued as asset-sales.
Valued on the fair market value of assets they own or their POTENTIAL to produce revenue.
Like a 10 year old manufacturing business that is losing a little money, but has a whole shop full of paid-off machinery. Or real estate...or a trademark...or a service contract that has value etc.
In this case the fair market value of the links...or the site development work...or page rank.
Links are easy to value because there is an established value for paid links. You can create a comparative price model(comps).
Some of the more obscure assets fall under what they call "blue-sky" or "goodwill" and it's harder to value those. Kind of comes down to how badly somebody wants your business, and how well you market it.
All the really high earnings multiples are based on people betting on the come...kind of like a pharmaceutical company that just got a new drug approved. They might have lost money forever, but they will be valued on the potential value of the asset(the newly approved drug).
Another interesting point was made about whether it's a real business or not if you don't have employees. That's another whole thread. But you can sell either kind of business. They are just attractive to different buyers.
A guy like me who got tired of employee hassles may love a one-man bus. No FICA, FUDA, Unemploment, Workers Comp, EEO issues...Hell Ya (opps..sorry) But somebody looking to scale-up a huge empire may not.
Universally though the most common fantasy among business owners is that they can sell their business for more than they can (mine too :o)
The most common fantasy among buyers is that they will find some nice old man that needs their unique skill set to take over for them and sell it to them for "nothing down"
I would caution that some brokers do exactly what estate agents do: quote an inflated value just to get your instruction.
...value of links
To call that entity a "failure" simply because it doesn't have employees or a "team" is just silly. In fact, if you can mimimize your overhead and do the job of a whole "team" yourself, then that is brilliant.
Bill Gates wouldn't say it's brilliant to save on a whole team and be a one-man show.
So if I hire a secretary, then my business is suddenly a REAL business? If I die, would that secretary know how to carry the business? What you are suggesting is the concept of a self-sufficient machine. If I die today, my websites will continue to make money. My family knows what to do with my organization/websites in the event of my untimely demise. They can sell the websites or operate them as they see fit. That sounds like a "business" according to your definition. And, in the mean time, I don't have to shell out money to pay that secretary ;)
That's not to say that an owner-operated business isn't a good thing, it's just more difficult to value and sell. It's also riskier for the buyer since, in essence, there will be 100% staff turnover at time of transfer.
